The People's Bank of China is cutting its one year deposit rate to 2.75% from 3.0% to try to revive the flagging economy.
The cut, which took the markets by surprise, was the first since 2012, and comes into effect on Saturday.
The one-year lending rate will also be reduced from 6% to 5.6%.
On Thursday figures showed China's factory output contracting for the first time in six months.
Economic growth slowed to a five-year low of 7.3% last quarter.
Many economists had expected China to stimulate economic growth through fiscal spending rather than lowering rates.
To offset the effect of lower rates on savers the bank said it would give banks the flexibility to offer higher deposit rates, up to 1.2 times the benchmark level, rather than 1.1 times.
Shares in mining companies jumped by 3-4% after the cut on the hope that better growth would help sales of raw materials to China.
Shares in Rio Tinto surged 3.9% percent and BHP Billiton rose 2.9%.
The Australian and New Zealand currencies also strengthened reflecting their dependence on trade with China.
President Xi Jinping told chief executives at the Asia Pacific Economic Cooperation Summit this month that the risks faced by China's economy were "not that scary"
He said the government was confident it could head off the dangers.
He said even if China's economy were to grow just 7%, that would still be at the forefront of the world's economies.
In June the World Bank said China was undergoing structural changes as the "drivers of economic growth continued to shift from manufacturing to services on the supply side, and from investment to consumption on the demand side."